2026 Perspectives for the Public Sector

The Decline of ODA Global donors have announced dramatic reductions in ODA this year. McKinsey estimates that aid will drop by $41 to $ 60 billion (15-22%) compared to 2023. 2 While still vital in humanitarian crises, ODA has struggled to keep pace with global needs. The UN estimates that achieving the Sustainable Development Goals would require $4 trillion annually in additional investments — orders of magnitude beyond what donor governments can, or would be willing, to provide. At the same time, the legitimacy of aid itself is being questioned. Critics argue that ODA has failed to catalyze lasting development, that it entrenches dependency, and that it does not align with the political imperatives of donor countries. Governments facing populist pressure at home are increasingly reluctant to justify foreign aid while struggling to finance domestic health, housing and pension systems. Such a dramatic decrease will doubtless accelerate a shift that was already underway. Over the past decade, development finance has increasingly focused on blended finance, public-private partnerships, guarantees and credit- enhanced financing structures are attempting to fill the gap. This transition will now be turbocharged. 2 “A generational shift: The future of foreign aid,” published by McKinsey & Company. 6May 2025. <https://www.mckinsey.com/industries/social-sector/our-insights/a-generational-shift-the-future-of- foreign-aid> 3 “Trends inWorldMilitary Expenditure, 2024,” published by the Stockholm International Peace Research Institute. April 2025. < https://www.sipri.org/publications/2025/sipri-fact-sheets/trends-world- military-expenditure-2024> 4 USAIDmanaged ~$35 in combined appropriations FY2024 according to Congressional records <https://www.congress.gov/crs-product/IF10261 > Guns Over Grants Critically, the drop in ODA is not taking place in a vacuum. It occurs at a time when defense spending is on the rise. Arguably, it is this shift that presents the most meaningful challenge to the traditional understanding of development finance. Defense spending has soared to unprecedented levels over the past five years. Global military expenditure reached $2.7 trillion in 2024, dwarfing ODA flows. In the United States, the 2025 defense budget request is higher than $900 billion dollars compared with the now defunct USAID’s budget of $30 billion. NATO countries collectively now spend more than twice as much on arms as the world does on development aid. Across Europe, defense ministries are clawing back fiscal space that once went to international aid. Germany, once a champion of climate finance, has signaled the “Zeitenwende” (its new era of re-armament) takes precedence. 3, 4 This is about more than just money. It’s about a shift in narrative. Defense spending is now framed as urgent, existential and politically unassailable. ODA, by contrast, has been recast as optional, inefficient, or even naïve. Rising global defense spending, driven by geopolitical turbulence, complicates development finance. While it risks diverting funds from foreign aid and green initiatives — especially impacting ODA and MDB-supported renewable energy in emerging markets — it can also catalyze energy innovation. Historically, military R&D benefits civilian sectors. Military energy independence fosters breakthroughs in: • Advanced Energy Storage: Enhances grid reliability. • Microgrids/Decentralized Power: Supports localized energy and electrification. • Efficiency: Drives civilian energy savings. • Advanced Materials: Improves renewables infrastructure. • Energy Cybersecurity: Protects digitized grids. This “security premium” in resilient energy, though not direct “green” investment, indirectly accelerates the energy transition via technological spillover, creating new investment opportunities. For years, the energy transition was framed around climate change — cutting emissions, accelerating the shift to renewables, and meeting Paris Agreement targets. 38 Changing Dynamics of Development Finance